Wednesday, 8 August 2018

What Waste Exists in Your Supply Chain

The UK luxury brand Burberry was reported to have burned up to $50 million of unsold products in FY 2017/18 and up to $150 million over the past five years. It is doing this to protect their premium brand status rather than selling the products at discounted prices.

They believe by doing so maintains their reputation as a high-end brand because it reduces the number of their products being sold at discounted prices. Business Insider had an article the other day indicating that Under Armour beat second quarter expectations but, "is still sitting on a mountain of unsold inventory, which grew 11% to US$ 1.3 Billion in the most recent quarter". Yes, you read that right, with a B. Business Insider goes on to report that fashion houses, in general, have a troubling issue with unsold inventory naming companies such as; Gap, Ralph Lauren and of course they named Burberry. H&M reported it has UD$ 4.3 Billion worth of unsold inventory.

In responding to the criticism in the press recently, Burberry has responded by saying they have some great environmental initiatives within their supply chain. What I find of greater concern is if they have managed to instil environmental initiatives within the supply chain, why haven’t they inculcated better “Lean” initiatives?

It is clear that Burberry and these other fashion houses are manufacturing more goods than there is actual demand. Otherwise, they wouldn’t be in this position of having to destroy or sit on so many unsold products. In a press statement, a spokesperson for Burberry said the disposal was due to a one-off agreement with Coty for beauty products. However, the five-year write off numbers puts this statement in serious question.

Unfortunately, this practice of destroying products is common in the fashion industry. Cartier, for example, is quoted as having recently destroyed products worth €481 million.

So it surprises me that these companies do not have better systems in place. In this day and age when manufacturing systems and technologies are available to help overcome, or more importantly prevent, this exact problem of overproduction. Systems that will trigger manufacturing activities when a real demand signal is identified rather than generating overproduction as is clearly the case at the moment.

I am also surprised that the boards and company executives have allowed this situation to exist. Perhaps because their margins are at the premium end there has been less pressure to adopt lean practices than in other businesses. More likely, however, is the fact that many companies consider inventory to be cheap. Rarely do you see an organisation report a cost for holding inventory in the P&L. It is not until they have to make a financial write-off, then the real cost of holding this inventory actually surfaces. In my day to day work as a trusted advisor, I am consistently surprised how often I am having the debate with executives over the benefits of instilling good inventory practices into their business.

So many companies either rarely conduct stocktakes or when they do, it is because the auditor or end of year financials require one. The benefits of high inventory turns and accuracy in your inventory numbers is enormous. By simply using real-time data capture systems connected to your system of record, your ERP system, and performing well-structured cycle counting regimes you are 80% of the way to solving this issue.

If I was a shareholder in these companies I would be extremely annoyed to see such waste of resources and capital. These organisations clearly do not have a continual improvement culture. (I have used continual rather than continuous deliberately. If you are not sure why I have done this, call me and I will explain).

It is a common misconception, in my opinion, that lean principles and ERP do not work well together. I believe this to be false, they can work well together. In addition to benefiting from adopting lean manufacturing practices, organisations like these will reap significant benefits from leveraging the power of machine learning capabilities that are becoming available today to help improve their forecasting capabilities.

So with all this in mind, what are the potential lessons in this for you? My thoughts are not groundbreaking, but it is clear they are not widely adopted. The actions I feel you should take are: 

  • Don’t wait for market pressures to force you to review processes. By adopting a continual improvement culture in your company you are constantly looking for and adopting better ways. If this is not pervasive within your company, take steps to make it so. 
  • Fully understand the difference between value adding and non-value adding activities and then apply this understanding to your business processes. 
  • Take an honest review of your business and the process you have adopted and identify the non-value adding activities. Then take proactive action to remove them. 
  • Take steps now, because as the US interest rates position shows, money seems to be getting more expensive every day and will most likely continue to do so. Therefore your inventory won't be as cheap as it has been. 

© David Ogilvie

Saturday, 1 April 2017

Observations from recent trip to Sth East Asia

At the beginning of March, a mate of mine and I headed off to Asia to look at the "Destiny Rescue" projects we had raised money for. I also took the opportunity to conduct some business and hold some key meetings in Singapore. Below are some of my observations:

  • Corruption is so widespread in Asia, we are lucky to live and work in the country and business environment we do. While our system is not perfect, it is substantially better than in some areas of the world.
  • The poverty in some areas was head spinning.
  • There are so many more important issues to deal with than those we see on our nightly news, TV screens and those that our politicians want to discuss. For example, I can't believe the Victorian government is wasting time, energy and money on gender equalling walk signs. Really!!!, is that the most important issue we have ATM?
  • The Hilton Singapore has THE best breakfast I have every experienced. I generally don’t like hotel breakfasts, they are cold despite the kerosene heated bain-mares.
  • The level of success and work competed by the team from Destiny Rescue in Cambodia blew me away. Robert Webber has done an outstanding job in his time as country manager. Also a big Thank You again to Jeremy Sargent who was the GM Breville Australia when he made the decision to donate a large range of kitchen appliances to Destiny Rescue.
  • I was very impressed by the enterprise of the people in Asia. While it is mostly driven by necessity, it is still very impressive. Every house I saw in the country Cambodia had a stall or shop of some sort selling something. There is no doubt the fact there is no social safety net available contributes to this. Australia could do with a little more enterprise spirit demonstrated by they Khmer.
  • There doesn’t appear to be any depression in these countries. No one goes to their shrink here. Perhaps people like Grant Hackett could do with a little of the Khmer spirit—maybe it would help him deal with his demons.
  • Decent coffee is hard to find. However, the Arabica bean isn’t the only bean with flavour.
  • How wonderful the weather in Asia can be. I was expecting a stifling hot, humid and rainy trip. But we had fantastic weather. Early March is a great time to visit.
  • I was reminded how unfair the world can be. Many people strive for equality in this country when the reality is we can strive for equality of opportunity but not status.
  • I was reminded how far behind the rest of the world the Australian Tax system is. I saw that I could purchase a bottle of Bundy rum substantially cheaper overseas than I could in my home city—and I don’t mean from a duty-free store. I mean in a retail supermarket. If the Government doesn’t do something about our tax system soon, there will be a massive exodus of talent from Aust. This would be disastrous for the country.
  • This notion of opportunities outside of Aust seems to go in waves, I recall my father considering this when I was young. An old idea’s time may be approaching again.
  • I learnt that you don’t have to be a Microsft Dynamics 365 user to leverage the Azure capabilities of machine learning. This opens the door for a number of other ERP systems to compete without having to build their own capability.
I sincerely hope you gain some insights from my observations.

Monday, 27 February 2017

Customer Service - anathema of modern day business

I had some experiences recently that reminded me how important your corporate language is. On both occasions the companies involved overused the wording: "We apologise for any inconvenience caused", "Please hold as your call is important to us". Seriously if I hear these again, I think I will explode. They are so overused they have lost any meaning, except that of: "We don't care about you, you are nothing more than a number to us".

Great service stands out. Companies that provide great service have empowered employees, that is they are able to make a decision that will impact their relationship with you. Not simply follow a process or worse still have some technology manage the process. (I had one company recently that their phone was NEVER off engaged. I am certain it was a policy to get everyone to use their website - disgraceful. I called at all hours of the day on all days of the week and EVERY TIME it was engaged, Thanks for nothing "Ticketmaster" )

Things you can do to ensure you don't follow the masses into that ugly melting pot of disgraceful service are:

  • Have a real human speak to the customer
  • Don't make the customer wait 20 min on hold
  • Actually have a phone number that works
  • Allow your customer service team to fix the problem. Don't constrain them with policy
The level of service in this country is diminishing rapidly. This gives your business a greater opportunity to stand out - make sure you take that opportunity by providing outstanding service. It's the best marketing campaign you can ever have. 

P.S. If there are any budding technology start-ups out there; there is a great opportunity to provide a decent concert and sporting ticketing service out there. One that actually takes the word service seriously. The ones we have at the moment are appalling.

Monday, 23 January 2017

CEO Education

ERP vendors have often described to me their prospects as being in a “raw state”—raw in the sense that they are new to the process, haven’t done this before and are expecting some guidance. While having a prospect eager for guidance is great for the vendor, they find themselves in a dichotomy.

On the one hand, by wanting to provide great truthful advice, some vendors can, unfortunately, place their sale at risk when competing vendors tell a contradictory and simpler story. On the other hand, some clients, while needing the advice, view it with a high degree of skepticism, thinking the advice might be manipulated because, “After all, they are just trying to sell me something.”

There is no doubt in my mind that executives contemplating replacing their ERP system should obtain some education in this process before they embark on their journey. It is critical they understand what it takes to get the best from software vendors and to fully understand how they should behave in the relationship, thereby ensuring they have the right resources and budget to ensure success.

Until recently this education has been sadly lacking, leaving executives to their own devices. This is, in my view, a major contributing factor to the very high failure rate of ERP implementations. It is unacceptable that in excess of 85% of them fail in some form or another. What is also unacceptable is the high number of acrimonious relationships between client and vendor. This is a major reason why there is such a high churn rate between vendors. I know some successful Microsoft vendors, for example, who have based their whole growth strategy on picking up unhappy customers from other vendors.

While this is great for them, my view is that these relationships should not get to the point of failure in the first place.  This situation should not exist. There has been a significant level of pain and financial waste to get to that point. We should do something to stop it.

Some education on what is an acceptable expectation for both parties helps to set the stage for success. Unfortunately, this understanding is currently being forged in the heat of battle.

Should this type of education be available before executives commenced their ERP journey and entered into a relationship with a vendor, I firmly believe the number of executives whose careers are put at risk due to failed implementations would be dramatically reduced, and the success rate of implementations could be in the 80 percentile rather than the failure rate being at this level.

For this reason, I have developed two workshops designed specifically to help executives select the right product in the first place and to show them how to successfully implement their ERP.

For more information on my workshops, contact me on: and have “Workshop” in the subject line.

Thursday, 5 January 2017

Microsoft Dynamics 365

Firstly, Happy New Year to everyone. I sincerely hope the Christmas and New Year break was an enjoyable one for you.

I was catching up on some emails & checking my Twitter account this morning when I noticed this posting from a company asking "should you (being your company) upgrade to Dynamics 365 or stay with your current version of AX".

Some quick background for those not in the Microsoft eco-system. Microsoft has recently released their latest cloud ERP offering to the market and called it Dynamics 365. It is a combination of a number of their existing products such as CRM, NAV and AX. They have renamed the AX product as operations in the new version.

Back to this morning... I followed this link and was presented with a questionnaire that was supposed to provide me with guidance on whether an upgrade to the new version was suitable for me or not. I completed this form and surprise surprise, it recommended I consider upgrading. This was in spite of one of my answers indicating I preferred an on-premise solution. So I answered the questionnaire again, this time with a different set of answers. Surprise surprise, it still recommended I consider upgrading. I did this with a third set and I think you know the result...

Software vendors really don't do themselves any favors with blatant tactics like this. It is clearly not designed to provide the customer with any genuine information about what is in their best interests or not, but simply to generate a sales prospect. It is no wonder that over the years so many organisations have got themselves into trouble with ERP implementations. This poor attitude towards the client has to change. And while not all software vendors are in this category - unfortunately, a large portion of the industry is.

Clients of ERP vendors and those considering changing their systems, really do need independent help to sift through this type of rubbish. Just as a buyer's broker can provide great assistance to those who don't buy cars or real estate regularly, an independent ERP consultant can be worth their weight in gold for those who don't buy or upgrade ERP systems often. (On another point, not only because I am heavier than my Doctor would like me to be, I provide great value to my clients, and so am worth a lot of gold ;-) )

Tuesday, 13 December 2016

My predictions for 2017

With the full understanding forecasting or predicting can be fraught with the danger of getting egg on your face, here are a couple of my thoughts on what might happen next year.
  • This is the year business will start to pay more for money. Interest rates will increase. Unless you’re fully cashed up, start to review how you’re deploying your capital. Take steps to reduce debt. It has been more than 25 years since we have had a recession, so many bad habits will have crept into the business. I see so many businesses today that have lost sight of the real cost of inventory. There is a belief that inventory is cheap. This will come back to bite executives unless they address these habits soon.

  • Technology is about to deliver the next big breakthrough with machine learning or predictive analytics capabilities. Effective use of these technologies is predicated on having clean underlying data and stable business processes.  Trouble is, most organisations haven’t fully utilised the capabilities of their system now, let alone been ready to effectively exploit these new capabilities.

  • ERP replacement will be a hot topic in 2017. Many organisations last changed their system prior to the dreaded Y2K bug, which means they are operating on systems around 18 years old. This technology definitely cannot exploit the capabilities I just mentioned. As competition starts to get better at understanding the customer through their data analytics, the underlying business system will have to change.

Tuesday, 22 December 2015

VW Scandal - why the goal of being No 1 is bad for business

The Australian Financial Review today published an article by Leah McGrath Goodman entitled, "VW Emissions-rigging software a team effort". The original article can be found here:

I recently wrote a piece on this very subject and would like to reproduce it here ..... please feel free to comment.

Why striving for the number one position in your industry is a bad goal

The recent scandal at VW had me thinking. It reminded me of all the times I have seen well-intended goals and performance measures end up producing terrible or unintended consequences. This experience has been the driving force behind my belief that you should NEVER set a goal of being number 1 in your industry. I know the great Jack Welch had a philosophy that his divisions at GE had to be either number one or two in their industry but the overwhelming evidence leads to the conclusion that under normal circumstances this isn’t a good idea. (Jack was an extraordinary leader and may possibly be the one exception that proves the rule).

As the ole saying goes – “What gets measured gets done”. The problem is more often than not what gets done is not what the measure was set up for in the first place. The business world is full of unhappy and unsatisfactory results from poorly designed KPI’s and goals.

While reaching number one is a laudable endeavour and achievement, however the achievement of reaching number one in your industry should be the result of a different set of goals than that of being number one. There have been some recent high profile examples of why specifically targeting number one is a bad idea. Take for example the following cases:

·      Toyota and their massive recall quality issues.
In around 2002 Toyota set a goal of being the largest vehicle manufacturer in the world. In doing so it targeted growth primarily in the USA as its path. Having initiated its presence in the USA with a joint venture with GM at the NUMMI plant in Kentucky it grew its USA manufacturing base to seven plants in:
o   Mississippi
o   Two separate plants in Kentucky
o   Texas
o   Indiana
o   Alabama
o   West Virginia

They also have plants in Argentina, Australia, Belgium, four in Brazil, two in Canada, two in Colombia, South Africa, France, Indonesia, sixteen in their homeland of Japan, Mexico, Philippines, Portugal, Russia, four in Thailand, Turkey and two in the UK. They also have 18 other plants in joint ventures in other countries including China and India.

As Toyota grew rapidly it lost its ability to inculcate the “Toyota Way” into its new employees and new plant processes. Previous growth was a result of a patient approach to developing people in the company with knowledge about the Toyota Way. A key component of the Toyota Way is to work closely and in some cases within the businesses of their suppliers to assist them to adapt to and adopt the new paradigm. This was not done well in a rapidly growing environment.

This resulted in quality issues sneaking into the process and was exacerbated by the level of growth the company was experiencing. My view is if the executives had a goal of ensuring the Toyota Way was successfully inculcated into every new plant – this would have ended up with a completely different result. They may not have become number one as quickly – but I firmly believe they would not have had as dramatic a crisis to deal with as they ended up having.
·      VW and their devious deception of the emission results on diesels. They too set a target of being number one. They too identified that leadership in the USA was their path to this position. In February 2007 the new CEO Martin Winterkorn was appointed and from his first day in office, he is aware that the group’s U.S. business is floundering. He believes that only diesel engines will enable VW to gain significant market share in the United States and to fend off Japanese rival Toyota and its hybrid drive.

In January 12, 2008 At the Detroit Motor Show, Matthias Wissmann, president of German automotive industry association VDA, says 2008 will be the year in which “clean diesel” achieves a breakthrough in the U.S. market. He predicts diesel cars will increase their market share from 3 to 15 percent by 2015, thanks to rising oil prices and stricter emissions standards.

In August 2008 Volkswagen announces the launch of the VW Jetta 2.0 TDI in the United States, based on the EA 189. The company highlights the car’s low fuel consumption and low emissions, which have been made possible thanks to the cheat software.

Early 2014 the environmental organization ICCT tests actual emissions figures for diesel cars and finds that the two Volkswagen models are well above the limits, exceeding the guidelines 35-fold in extreme cases. In May 2014 two U.S. authorities are informed of this, the Environmental Protection Agency and the California Air Resources Board, a state agency. They commence official investigations into Volkswagen. VW indicates that it is willing to discuss the matter, conducts its own investigations and repeatedly compares the results on both sides.

It is clear that the drive to be number one resulted in practices and decisions being made that were, at least in hindsight – however should have been known at the time, deceitful and unethical. Again my belief is if the advantage of efficient diesels were in fact the game changer they expected – the setting goals around this would have helped them become number one. No target being number one as a prime goal.

·      Sears Roebuck in the 1990s found themselves in a situation where executives mandated a sales goal for automotive mechanics of $147 an hour. Rather than work faster, as was the expectation, employees met the goal by overcharging for their services and “repairing” things that weren’t broken.
·      The 2008 financial collapse, in which “motivated blindness” (explained below) contributed to some bad decision-making. The “independent” credit rating agencies that famously gave AAA ratings to collateralized mortgage securities of demonstrably low quality helped build a house of cards that ultimately came crashing down, driving a wave of foreclosures that pushed thousands of people out of their homes. Why did the agencies vouch for those risky securities?

These four examples demonstrate the unexpected consequences of poorly thought out goals. A smaller but no less important example is where companies of all sizes mandate cost cutting programs (see my article 7 reasons why cost cutting is the worst thing for your business). Procurement cost cutting more often than not results in the purchase of inferior quality parts that leads to further expense somewhere down the supply/manufacturing/maintenance chain.

It’s well documented that people see what they want to see and easily miss contradictory information when it’s in their interest to remain ignorant—a psychological phenomenon known as “motivated blindness”. The root cause of this blindness or self-interest is in the setting of goals and the incentives attached to those goals.

So how do you avoid these consequences when you want to set goals and incentives within your business? I have developed 5 steps to setting worthwhile goals:

1.     Examining what behavours you want in your business. Leaders setting goals need to view the situation from the perspective of those whose behavior they are trying to influence and think through their potential responses. This will help head off unintended consequences and prevent employees from “motivated blindness”.
2.     Having goals such as honest reporting are just as important to reward if not more so. When leaders fail to meet this responsibility, they can be viewed as not only promoting unethical behavior but also blindly engaging in it themselves.
3.     Identify how one measures the achievement of these goals. The goal has to be quantifiable.
4.     Set up the measuring of this goal so that it occurs as part of the normal process of conducting business. Your ERP system should be able to assist here albeit it may require a modification or specific BI report to be written. It is not until we examine what behavours are occurring in the business are we in a position to understand if the consequences are unexpected or not.
5.     As with all KPI’s or incentives constant monitoring of the result and the act of asking questions around the specific KPI results, is crucial to making this process work. One must monitor if the goal or incentive is having the desired impact. Without these actions being taken – the chances of motivated blindness dramatically increase.
6.     Examine how the cognitive biases that result from the motivated blindness could potentially distort ethical decision-making. For example, the most common problem executives report around the setting of goals and incentives is that their sales forces maximize sales rather than profits. I see this every day in all the client’s businesses I work with. I ask what incentives are they giving their salespeople, and they confess to actually rewarding sales rather than profits.

The lesson is clear: When employees behave in undesirable ways, it’s a good idea to look at what you’re encouraging them to do. Examine if you have followed the six steps completely. If you do; your chances of goals and incentives being productive is greatly enhanced.

Contact Details:
David Ogilvie
Ph: +61 (0) 438 787 759

© Copyright David Ogilvie 2015